当前位置: 首页 > >

Chapter 6 Letter of credit 信用证

发布时间:

Chapter 6

Letter of Credit

Importers and exporters could not enter into a contract on the basis of commercial credit when they contact for the first time and not know each other well. The buyers are worried that the seller might not deliver goods in terms of contract, e.g. not deliver on schedule or the quality of goods might not comply with the specification of contract, while the sellers are worried that buyers might not make payment on schedule or refuse to pay. If so, both sides can enter into a deal with the help of banks,in which buyer’s bank could assure the seller with bank’s credit that so long as complied documents are submitted by seller, banks would pay and that banks would issue L/C in term of buyer’s requirements and examine the documents presented by seller. If documents do not comply with L/C’s requirements, bank would reject them. Otherwise, bank would compensate buyer. Buyers apply for issuing L/C at his bank, the contents of which include the description of goods, its quantity, specification, price and amount, packing, latest shipment and documents presentation and their categories and numbers, etc. To sum up, buyer can write all his concerns into L/C and ask bank to check on them. Sellers are to produce and make shipment when receiving the L/C issued by bank, for seller is certain that bank have to abide by his promise – banks live on credit, otherwise there would be run on banks. In L/C transaction, banks must keep both eyes open to avoid the involvement in the disputes between buyer and seller. Banks offer the service with compensation. L/C belongs to off-balance sheet business.

Seller

Why use letter of credit?
Your bank must guarantee the payment, otherwise no contract.

I will undertake to you to pay immediately provided that the documents handed in by you conform to terms and conditions of letter of credit. O.K, I will let my bank guarantee the payment against conditions I prescribe.

Buyer

Issuing bank

Banker’s credit is better than trader’s credit

Definition of Letter of Credit
The documentary credit or letter of credit is an undertaking in writing issued by a bank for the account of the buyer ( the applicant ) or for its own account, to pay the beneficiary the value of

the draft and or documents provided that the
terms and conditions of the documentary are

complied with.
Who set forth the terms and conditions in the letter of credit ?

Buyer and seller set forth the terms and conditions in LC.

Benefits of documentary credit Exporter
Deliver goods Deliver goods

Importer

Carrier
Long distance, hard to get to know each other Guarantee payment against documents stipulated in LC
Pay against documents not goods.

Ask to guarantee payment to exporter

Documents

Banker

Banker does not care about goods, for bankers do not know about goods.

The flow chart of documentary credit operation(1)
Exporter 1 Contract Term of payment: Documentary Credit 2Buyer applies L/C according to Contract
2,3 Buyer’s account bank who offers a package
4

Importer

Beneficiary

Applicant

Advise

of service including LC. It undertakes to exporter that it would pay independent of whether applicant is bankrupt or not, provided documents presented by exporter comply with terms and conditions of LC.
3Documentary credit 3 Independent bank’s credit backing & clear-cut payment promise. Reduce/eliminate commercial risk. Reduce exchange & political risks. Financing to both seller and buyer. Expand sources of supply

2

Apply

Advising Bank

Issuing Bank

Exporter

The flow chart of documentary credit operation(2) 5Dispatch goods

Importer
13B/L 14Deliver

Beneficiary

6

B/L

Carrier

goods

7He

must hands in documents stipulated in LC, because banks deal only with documents, not goods or service.
7documents 8

Applicant

Pay

Exporter’s bank, who would advise and examine documents for issuing bank and on basis of correspondent agreement.
8

11documents 12

pay

= pay without recourse 9Forward docs to and claim on Advising bank acting as nominated bank
10It

10Reimburse

would examine the documents against LC

Issuing Bank

3 contracts
Exporter Commercial contract Importer

LC transaction refers to this contract.

Buyer and seller must not interfere in Bank’s decision on whether documents comply with LC LC application contract contract
Once opened, LC is independent of other contracts, i.e. commercial contract and application though LC is opened on them.

Bank’s standard for examining documents is LC, not other contracts.

Issuing bank

Importer fills in application in strict accordance with commercial contract Issuing bank opens LC in strict accordance with application.

Legal protection (1)
“Uniform Customs and Practices of Documentary Credit, UCP”, ICC(International Chamber of Commerce , ICC) publication No. 500 governs letter of credit transaction. If terms and conditions in LC contradicts to UCP, they take priority over UCP, for it is not a law. The other parts of LC not contrary to UCP are still subject to UCP.
In LC transaction, all contracts including application, LC advice, documentary credit, amendment application and advice, confirmation, payment, acceptance, etc. are indicated that “ It is subject to UCP500…….”.

Legal protection (2)
ICC is not a legislative institution. It is a nongovernmental organization, whose rules are accepted by banks through collective notification to the ICC, and by respective National Committee of the ICC, by the national bank association of the country, by a bank’s individual adherence and notification to the ICC, or by incorporation of the UCP in the documentary credit (contract).

Parties to documentary credit operation Exporter
Nominated bank is usually issuing bank’s correspondents, who carry out LC instruction on basis of agency agreement, including: - Paying Bank, - Deferred Payment Bank, -Accepting Bank, - Negotiating Bank, depending on the type of LC Accountee, opener

Beneficiary

Applicant

3Advise 4documents

They are the major parties in LC contract. It can also be “Confirming Bank”
2Documentary 5Forward

1

Apply

credit
Issuing Bank Reimbursing Bank

documents & claim
6Reimburse

Advising Bank

Nominated bank and claiming bank

When LC is denominated in third currency
USA Reimbursing Bank

3Claim

on US reimbursing bank according to LC, asking for credit of its USD a/c.

2Authorize

to debit

its USD a/c

1

LC denominated in USD
China, Claiming bank may be nominated Bank or its Home Office who has a/c relationship with reimbursing bank.

Italy Issuing Bank

Basic documentary credit procedure (1) Exporter Contract Term of payment: Importer

1. Documentary Credit Applicant Beneficiary 2. Naming an advising bank at seller’s domicile
3. Listing the required documents.For example, if buyer worries about quality of goods, he can demand Inspection Certificate issued by the required authority to be handed in by seller. The contents of the certificate could also be specified, e.g. impurity not more than 1.5%, depending on the attributes of goods. Buyer can fix delivery time (in LC, “not later than”) if he wants goods to be delivered in specified period of time, etc.

Basic documentary credit procedure (2) Applicant must obtain application forms from Issuing Bank, filling in, sign and stamp them and then hand them to issuing bank for opening LC. Applicant must hand in to issuing bank:
Applicant

- commission for issuing LC - deposit to be paid under LC by Issuing Bank

Apply; clear, correct,precise ,free from too much details & tech. terms.

Issuing Bank guarantees payment with applicant’s deposit(money), not with Issuing Bank’s money. Issuing Bank signs and stamps the application forms filled in by applicant and returns one to applicant as formal contract between applicant and Issuing Bank who must follow it.

Issuing Bank

Basic documentary credit procedure (3) Exporter 3LC must be informed to beneficiary through Advising Bank, which is correspondent of issuing bank and is not a major party in LC transaction. 3Advising bank must examine apparent authenticity of LC, whose service is for charge paid by beneficiary. Importer

Beneficiary

Applicant

3Advise

1Apply

2Documentary

credit
Issuing Bank

Advising Bank

If mailed, Advising Bank checks signature & seal of correspondent bank. If telegraphed ,check test key.

Basic documentary credit procedure (4) Exporter
4Demand

Importer revision
Applicant

Beneficiary

If he finds in LC any terms and conditions contradictory to commercial contract, he can return (or not) the LC and demand amendment.
5Apply

3Advise 7Amendment 4Return

LC

notification

for amendment 1Apply and hand in fees

4Return

LC notification Issuing Bank

2Documentary credit

Advising Bank

6Amendment

Exporter

Basic documentary credit procedure(5)
1Dispatch

Beneficiary

goods 2B/L

2The issuing date of B/L must

Carrier

not be later than the latest date in LC.

3Exporter must deliver the goods to carrier before or on the latest date stipulated in LC.
3Hand in docs. within validity of LC

3Exporter must prepare other documents stipulated in LC. For example, Commodity Inspection Bureau, for Inspection Certificate Insurance company, for insurance policy, etc. Embassy of importing country for consular invoice

nominated bank

Health quarantine station for Health Certificate

etc.

Exporter

Basic documentary credit procedure(6)
2Nominated bank would examine the documents against LC on behalf of Issuing Bank. If documents comply with LC, nominated bank would pay/accept /negotiate the documents according to the type of LC. 3Then, nominated bank sends documents to Issuing Bank

Beneficiary

2Pay / Accept / Negotiate

1docs

5recourse

Issuing bank would examine the documents against LC. If they comply with LC, Issuing Bank would reimburse Nominated bank.4 4If not comply, returns the documents to nominated bank.

3Forward docs to and claim on

nominated bank

4Return documents

Issuing Bank

Basic documentary credit procedure(7)
Exporter

Beneficiary

5,6 Sometimes, applicant does not render deposit with consent of Issuing Bank which provides finance to importer. Then, importer must pay Applicant for documents. Although applicant examines documents, the final decision should be made by issuing bank.
6pay
5documents

Importer

1Doc.

2Pay compliant documents

Because it is the undertaking of issuing bank to pay beneficiary, not applicant.
4Reimburse for compliant docs. with importer’s deposit

Nominated bank

3Forward documents & claim on

Issuing Bank

Types of LC: Revocable LC
Exporter
1Promote sticker 8Dispatch goods as quickly as he can before Issuing Bank’s cancellation 2Demand LC settlement
4Require Revocable LC

Importer
3Very little margin in the market
8Applicant can revoke LC at any time, if market is unfavorable.

beneficiary

Applicant

7Adv.
9Docs.

Carrier

10If nominated bank decides that documents

comply with LC before receipt of cancellation , Issuing Bank can not cancel LC any more. 6Revocable LC: We undertake to honor your drafts drawn & negotiated in conformity with LC provided such negotiation has been made prior to your receipt of notice of cancellation . (In fact, there is no payment undertaking of Issuing Bank revocable LC).

5Apply for Revocable LC

Advising & Negotiating Bank

Issuing Bank

Types of LC: Irrevocable Unconfirmed LC
Exporter 1Contract Term of payment: Importer

Irrevocable
Beneficiary Documentary Credit

Applicant

4Advise

This kind of LC has expressly undertaking of Issuing Bank and most widely used in the world at present.

2Apply

Advising Bank

3Irrevocable Documentary credit: It can not be revised or cancelled without consents of all the major parties. Confirmation Instruction: Without( with)your confirmation) (P.150)

Issuing Bank

Type of LC: Confirmed Credit (1)
Exporter
2Contract, Term of payment: Irrevocable Documentary Credit Importer

Beneficiary

5Advise confirmed LC

by a confirming bank in his own country, e.g. by advising bank or other banks In the importing country, there might be: strike war exchange control
Possible bankruptcy of issuing bank, etc.

1He can demand that LC be confirmed

Applicant

3Apply for Confirmed LC

All these factors might delay or stop payment under LC.
Confirming fee is borne by applicant. Advising Bank
Confirming Bank

4Documentary credit
Confirmation Instruction: (P151) Confirmed (by Advising Bank)

Issuing Bank

Type of LC: Confirmed Credit (2)
Exporter
Advising Bank can refuse to confirm if it finds political and transfer risks of importing country are unbearable, for Confirming Bank’s payment is without recourse just as Issuing Bank is. If Issuing Bank finds discrepancies in the docs., it would refuse to reimburse Confirming Bank. So, Confirming Bank collects as high the fee as Issuing

Beneficiary

1Pay without recourse Bank, for their risks are the same. when deciding documents conforms to Double guarantee: If compliant docs., Confirming Bank must pay if Issuing Bank goes bankrupt. Issuing Bank must pay if the former goes bankrupt. LC.

Confirming Bank can refuse to accept the amendments of LC which might exceed its confirming limit to certain country risk. 3Returned docs. and refuse to reimburse

Advising Bank Confirming Bank

2Forward doc. and claim on

Issuing Bank

Type of LC: Confirmed Credit (3)
Exporter

Confirming bank can be another bank except for Advising Bank and be found by beneficiary itself though Issuing Bank does not ask for confirmation. This is silent confirmation.

Beneficiary

Find a Confirming Bank by it self and on its own account. Beneficiary must hand in documents to Confirming Bank. Otherwise, Confirming Bank’s responsibility is automatically discharged.
Confirming Bank

Advising bank

Forward documents directly to issuing bank bypassing Confirming Bank.

Issuing Bank

Type of LC: Unconfirmed Credit
Exporter

Beneficiary

1Contract Term of payment: Unconfirmed Documentary Credit If importer’s country risk and Issuing Bank’s risk is endurable, there is no need to have LC confirmed by another bank for additional cost. Endurable Unconfirmed 3Documentary credit

Importer

Applicant

4Advise

2Apply

Advising Bank

Issuing Bank

Type of LC: Sight Credit
Exporter

1Contract Term of payment: DC Sight Payment If documents comply with LC, Paying Bank would debit Issuing Bank’s a/c & credit beneficiary’s a/c with or without recourse, depending on Issuing Bank’s instruction. Issuing Bank would examine the documents to see if there is any discrepancy. Sight payment / or payment 3Documentary credit 6documents

Importer

Beneficiary

Applicant

4Advise

2Apply

5Docs.

Advising Bank Issuing Bank’s a/c

Issuing Bank

Nominated Sight Payment Bank

Example of sight Documentary Letter of Credit P.122
At the request of Dearmei Trading Co., Ltd, Malaysia,…… available by your drafts drawn at sight on us covering 100% invoice value …… Special Clause: 1. This credit is available by draft drawn on Issuing Bank at sight……. We hereby guarantee that drafts drawn under and in compliance with the terms and conditions of this credit shall be duly accepted and paid at sight. Example on P132 Credit available with Nominated Bank: The American Advising Bank □ × by payment at sight …… Against the documents detailed herein: □ and Beneficiary’s draft(s) drawn on: The French Issuing Bank, Paris, ×

Type of LC: Time / Usance Credit
Exporter 1 Contract Term of payment: DC, Time Payment Importer

Beneficiary

If documents comply with LC, Accepting Bank would accept time draft and at maturity, debit Issuing Bank’s a/c & credit beneficiary’s a/c. Sometimes, Accepting Bank is Issuing Bank itself. Banker’s acceptance is often discounted by accepting bank itself.
Irrevocable Acceptance Credit, requiring that draft drawn on nominated Accepting Bank
3Documentary credit

Applicant

4Advise 5Docs.

2Apply

Advising Bank Issuing Bank’s a/c Nominated Accepting Bank

6Forward documents for examination

Issuing Bank

Example of time Documentary Letter of Credit P.124
…… Available by your draft(s) drawn on (nominated bank or Issuing Bank, 信用证下的汇票必须开给银行,书上的例子是错误的) at 120 days after sight, discount charges, stamp duty and acceptance commission are for the beneficiary’s account…… Available against presentation of the following documents…but payment only at XX days after presentation of documents (or payable at XX days after bill of lading date, etc. Example on P134

Credit available with Nominated Bank: The American Advising Bank …… □ × by acceptance of drafts at: 60 days after sight Against the documents detailed herein: □ and Beneficiary’s draft(s) drawn on: The French Issuing Bank, Paris, ×

Type of LC; Usance LC payable at sight (1)
Exporter 1 Contract DC, Sight payment Importer

Beneficiary

As applicant is unable to pay deposit ,it asks for bank’s finance, issuing usance LC, drawn on Issuing Bank,
e.g. asking beneficiary to draw time draft on Issuing Bank while usance draft is paid on sight payment.
3Documentary LC asking for usance draft to be paid at sight

Applicant

4Advice

2apply

Advising/ Negotiating Bank

Issuing Bank

Type of LC; Usance LC payable at sight (2)
Exporter Importer

Suppose LC amount is $100 If docs comply with LC, Issuing Bank accepts time draft & sells it to Discounting House. Suppose discount interest is $10.
Discounting House
10Sell

Beneficiary

Applicant

5Docs 6Discount +time on sight draft basis

acceptance for discounting

8 Pay

interest $10

9Docs

11$90 12Reimburse

$100
Issuing Bank

Negotiating Bank

7Forward docs+ time draft & claim on

Type of LC Usance LC payable at sight (3)
Exporter 13Before maturity of time draft, importer sells the goods and pay Issuing Bank with the money from sale.

Importer

Beneficiary

14At maturity of draft, Discounting House presents acceptance to Issuing Bank for payments.
Discounting House

Applicant

Docs Discount +time on sight draft basis

15$100

13Before maturity ,hands in $100

14Present acceptance for face value of draft

Reimburse $100

Negotiating Bank

Forward docs and claim on

Issuing Bank

Type of LC; Usance LC payable at sight (4)
Question

How much does importer pay to Issuing Bank? $110

Answer

Importer bears interest.

So, this kind of LC is also called buyer’s usance LC.

It is to provide finance to buyer.
Sample P125

As to seller , it is sight LC.

At the request of Tabowell…… Usance draft(s) at 180 days to be negotiated at sight basis and discount by us …...

Type of LC; Transferable Credit (1) Flow chart of the transaction Exporter
1Contract

Trader=middleman
1Contract

Importer

2nd beneficiary

1st beneficiary

Applicant

6Transferred

5Apply

2apply

LC

4Advise

3Transferable

LC

Advising Bank Transferring Bank

Issuing Bank

Type of LC; Transferable Credit (2) Flow chart of the transaction Exporter 7Dispatch goods

carrier
Trader

17Take delivery

Importer

of goods from Carrier

2nd beneficiary

1st beneficiary

9Payment

10Advise to change B/E & Invoice

12pay

15payment

11Substitute

16docs

Bill of Exchange & Invoice

8Present documents Transferring Bank

14payment 13Forward docs &

claim payments

Issuing Bank

Type of LC; Transferable Credit (3)

1. Middleman normally does not produce anything 2. He earns narrow margin from the difference between selling price and buying price.
Exporter Trader Importer Contract

Contract
GBP 12,000 GBP120 per ton

GBP 16,000 GBP160 per ton

His margin is GBP4000

The trader must try to cut down price with seller and raise price with buyer in his negotiation with seller and buyer.

Type of LC; Transferable Credit (3)

1. The trader wants to get payment guarantee from buyer bank and the seller wants to get payment guarantee from the trader’s bank.
Transferred 2LC Transferable 1LC Issuing Bank

Exporter

Transferring bank or trader’s bank

2. The trader would ask the buyer to open a transferable LC as he does not have enough working capital to open the second LC. 3.Thus, the trader could transfer the usage right including some amount to the seller.

Type of LC; Transferable Credit (4)

1. If the trader buys from several sources, transferable LC could be transferred to several second beneficiaries. 2. They are all second beneficiaries 3. Total amount should not exceed transferable LC
Second beneficiary Second beneficiary

Transferred LC Transferred LC
Transferring bank

Second beneficiary

Transferred LC

4.The precondition is that transferable LC allows partial shipment. 5. 2nd beneficiary are not allowed to transfer LC to 3rd beneficiary.

Type of LC; Transferable Credit (5)

When the trader apply for a transferred LC, he must fill in the application indicating whether he would allow transferring bank to inform any amendment in transferable LC to second beneficiary. For example, §increase of amount and extension of expiry in the original (transferable) LC,usually not allowed (retain Applied for transferred the rights on amendments) to inform 2nd beneficiary, a LC for the trader wants to retain the benefit for himself).

Trader

§ any change in the specification of goods, usually allow to inform as quickly as it can (waive the rights on amendments, so that second beneficiary can manufacture products of right specification as soon as possible).

Transferring bank

Type of LC; Transferable Credit (5)
1.The contents of transferred LC should be the same as transferable LC, with the following exceptions: 2nd beneficiary 2Transferred LC Issuing Bank

Transferring Bank

1Transferable LC

Addressed to: 2nd beneficiary
GBP12,000, GBP120 per ton Latest shipment: 2nd July Docs presented within 12 days of shipment Expiry date of LC: 14th July, 2003

Addressed to: trader GBP16,000, GBP160 per ton Latest shipment: 12th July, 2003 Docs be presented within 15 days of shipment. Expiry date of LC: 27th July, 2003

Type of LC; Transferable Credit (6)

1.The permitted decrease in transferred LC
● the amount of the credit ● any unit price stated in the credit

●the expiry date
● the last date for presentation of documents in accordance with Article 43 ( within 21 days of shipment). ● the period for shipment 2. But there is one exception The percentage of insurance cover can be increased

Type of LC; Transferable Credit (7)
2nd beneficiary Transferring Bank Issuing Bank

2Transferred LC
GBP12,000, GBP120 per ton GBP12,000 X (1+10%)=13,200

1Transferable LC
GBP16,000, GBP160 per ton GBP16,000 X (1+10%)=17,600

The insurance document handed in by 2nd beneficiary could not be used by 1st beneficiary under transferable LC. If 1st beneficiary increases coverage % in transferred LC, e.g.

17600/12000 x 100 ≈147% , GBP12000 ×(1+147%) = GBP17640
1st beneficiary could save the cost, by using 2nd beneficiary’s ins.doc.

Type of LC; Transferable Credit (8)

It is stipulated in Sub-article 32 (f) (ii) of UCP 500 that “ the minimum amount … insurance cover to have effected is CIF or CIP Value… plus 10%,

There is no specification on maximum amount.
Is it financial innovation (elude regulation)?

To make money, you can innovate new method, so long as not to violate the law.

Type of LC; Transferable Credit (9)

1. The trader(1st beneficiary) does not want to uncover his commercial secret with buyer and with seller. 2. So, it is stipulated in transferred LC that only only amount of coverage is shown on insurance document, not %
2nd beneficiary 2Transferred LC Trader 1Transferable LC Buyer

147% 17,640

110%

17,600

Otherwise, buyer would find out contract value of trader with 2nd beneficiary and squeeze trader’s margin.

Type of LC; Transferable Credit (10)
2nd beneficiary 2Under Transferred LC Transferring Bank Issuing Bank 1Under transferable LC

Invoice & draft To: trader GBP12,000

Invoice & draft To: buyer GBP16,000

2nd beneficiary issues invoice to trader & draft to transferring bank

Trader issues invoice to buyer & draft to issuing bank

The trader substitutes his invoice & draft for the ones of 2nd beneficiary to comply with terms and conditions of transferable LC.

Tianjin Exporter

Type of LC; Transferable Credit (11)
Trader, Hong Kong Contract Contract 1st beneficiary

USA Importer

2nd beneficiary

Applicant

4pay
2Adv 3documents Apply Advise

The later process is same as introduced before.

apply

5Documents & claim on
Tianjin Advising / Nominated bank

1Transferred LC

Transferable LC

Hong Kong Transferring Bank

USA Issuing Bank

Assignment of proceeds under LC (1)
Beneficiary

Before presenting documents to Nominated Bank; - Beneficiary asks nominated bank paying credit to reserve part of the LC proceeds Irrevocable assignment to beneficiary’s own supplier. Instruction - Nominated Bank advises supplier that it has received irrevocable instructions to make relevant payment to the supplier Forward doc out of the credit proceeds. ……..& claim on ……….
Nominated bank

Irrevocable advice

Supplier of beneficiary

Only proceeds are transferred, not the right of performing L/C.

Assignment of proceeds under LC (2) National law determines the extent and legal effect of assignment of documentary credit proceeds, e.g. countries under exchange control would not allow assignment of foreign exchange. Beneficiary’s instruction must in written form and irrevocable. In bank’s advice to supplier, bank will not guarantee the assignment. Only when documents presented by beneficiary are compliant would Nominated Bank pay the money to assignee. So assignee’s protection under assignment of proceeds is less than transferable LC under which beneficiary has direct control on whether proceeds can be obtained (its ability to control over documents delivered under LC to comply with LC.

If beneficiary’s creditor seizes the proceeds under assignment, bank would not be responsible. i.e. assignee’s entitlement to the proceeds depends on (1) the beneficiary’s making use of the credit (2) the bank having free use of the reserved part of the proceeds.

Type of LC: Deferred payment credit (1)
Exporter 1 Contract Term of payment: DC, Time Payment Importer

Beneficiary

4Advise 5Docs.

If documents comply with LC, nominated Deferred Payment Bank would accept docs. & engage that payment would be made at maturity when debit Issuing Bank’s a/c & credit beneficiary’s a/c. Irrevocable Deferred Payment 3Documentary credit

Applicant

2Apply

Advising Bank Issuing Bank’s a/c Nominated Deferred Payment Bank

6Documents for examination

Issuing Bank

Type of LC: Deferred payment credit (2)
A deferred payment credit is the same as acceptance credit except that in the absence of a bill of exchange there is no possibility for discounting, no finance for exporter through discounting. Since there is bill of exchange, time for payment is usually fixed as; at XX days after presentation of documents at XX days after bill of lading date, etc. Example on P136 Credit available with Nominated Bank: The American Advising Bank…… □ by deferred payment at: 60 days after presentation of documents × Against the documents detailed herein: □ and Beneficiary’s draft(s) drawn on: No bill of exchange

Type of LC: Negotiation Credit (1)
Exporter 1 Contract Term of payment: DC Sight/ Time Payment Importer

Beneficiary

4Adv
5Docs.

6Discounted cash

Negotiating Bank is allowed to discount the draft (time or sight) with recourse in case Issuing Bank refuses discrepant documents and to become holder in due course.

Applicant

2Apply

Issuing Bank would examine the documents to see if there is any discrepancy. 7Forward documents and claim on

Advising Bank Negotiating Bank

Bill of exchange drawn on Issuing Bank or other bank, not Negotiating Bank

3Negotiation DC can be time and sight

Issuing Bank

Type of LC: Negotiation Credit (2)
Normally, Negotiating Bank is confined to advising Bank or other banks at beneficiary’s place. Some negotiation credits would not confine negotiation to one bank, but to any banks within an area / city/country (freely negotiating credit), not worldwide to avoid fraud risk. If sight credit, discount interest(LIBOR) for claiming period, usu. 12 ~16 days, which is borne by beneficiary. If time credit, discount interest for claiming period + payment term Example on P137 There can be no draft to avoid stamp duty.

Credit available with Nominated Bank: The American Advising Bank …… □ × by negotiation Against the documents detailed herein: □ × and Beneficiary’s draft(s) drawn on: The French Issuing Bank, Paris,France ( never on Negotiating Bank).

Type of LC: Negotiation Credit (3)
Example on P.149 The Merchant Bank 521 Market Street, 28th floor San Francisco, CA93205 (Issuing Bank) …… Place of expiry: The French Advising Bank, Paris (Confined) …… Documents must be presented at the place of expiration not later…… …… The amount of each draft negotiated under this credit must be endorsed ……

If payment is made at Issuing Bank, a time lag would be Incurred (about 10 ~ 30 days for Sight Credit) before beneficiary gets payments. Negotiation LC solves the problem. The only shortcoming is that beneficiary must bear negotiation fees (=discounting interest)

Summary of LC settlement methods
Type Terms Draft Tenor of draft Drawee Optional可有/无 Sight Nominated Bank Confined Confined Deferred time
Shipment Presentation others

Sight LC

Deferred LC

Acceptance LC

Negotiation LC

Negotiation LC Freely Optional Sight
Issuing bank or Non negotiating Bank

No

Yes Usance Nominated Bank Confined

Optional Sight
Issuing bank or Non negotiating Bank

Confined or Freely Time of Payment Initial date Available with

Confined 限制性议付
Sight or time, deduct interest

Freely 自由议付
Sight or time deduct interest

At demand

At a tenor Acceptance Issuing bank/ Nominated bank

Issuing bank/ Nominated bank

Issuing bank/ Nominated bank

Nominated bank

Any bank Other than Issuing bank

Exporter

Type of LC: Revolving Credit (1)
Long term contract, dispatch goods in several lots. Terms of payment: DC Sight or Time Payment. 1 Applicant must pay for each application if he applies for LC each time before dispatch, a heavy cost. One application for all dispatches would demand large deposit, a burden to applicant, too. DC with revolving clause: Total amount for all dispatches Amount for each dispatch, The interval per each dispatch Automatic / Non-automatic reinstatement, accumulated / Non-accumulated. 3 Importer

Beneficiary

Applicant

4Adv.

Apply LC with 2 revolving clause & hands in deposit for first dispatch.

Advising / Nominated Bank

The rest of the operation is the same as other LC.

Issuing Bank

Type of LC: Revolving Credit (2)

Revolving Credit can be time or sight, depending on the demand of exporter & importer.
Its specialty is particularity on a special revolving clause, which save the cost of applicant & scheduling of manufacturing and delivery. Non-automatic Example, P140 Special instruction: This credit can be revolved three times. The amount of each shipment shall be reinstated after each negotiation only upon receipt of credit-writing importer’s issuing bank’s notice stating that the credit might be renewed. The total amount is USD300,00(Three Hundred Thousand US DOLLARS Only)
Revolving in relation to value

Type of LC: Revolving Credit (3) Other example
Revolving in relation to time

This is a monthly revolving credit which is available for up to the amount USD30,000 per month and the full credit amount will be automatically reinstated on the 1th day of each succeeding month. Our maximum liability under this revolving credit does not exceed USD180,000 being the aggregate value of six months

. The unused balance of each month is non cumulative
to the succeeding month

Can not be carried forward to the following month.

Type of LC: Back-to-Back Credit (1) Exporter
I want to buy 200 tons of sugar 3

Trader

I want to buy 200 tons of sugar 1

Importer

Open an LC to me 4

I can sell you. Please, open an LC to me 2

1.The buyer does not know that the trader is a middleman

2.The trader does not want to expose his middleman’s position
3. The trader does not have enough working capital to open LC. He has to wait the buyer’s LC

Type of LC: Back-to-Back Credit (2) Exporter Trader Importer

2nd beneficiary

1st beneficiary

6Advise

4 Apply & Hypothecate Master credit

1Apply 3Advise

Advise/ Nominated Bank

Back-to-back credit 5

Advising/ 2nd Issuing Bank

Primary/ Master Credit 2

Issuing bank

Type of LC: Back-to-Back Credit (3)

This is another way in which traders seek to give payment assurance to seller.

It differs from the transferable LC in one crucial respect.
The transferable LC is one the value of which can be nd shared by more than one 2 beneficiaries. Master Credit can only be used to open one Back-toBack Credit. The comparison of Transferable LC and Back-to-Back LC - Both credits involve a middleman as a seller - Both credits involve the substitution of documents

Type of LC: Back-to-Back Credit (4) - Transferred Credit expires at the counter of transferring bank. nd - Back-to-back credit expires at the counter of 2 Issuing bank. The most fundamental distinction of the two:
- Transferred credit derives its existence and utilization from transferable LC - In back-to-back credit operations, there are two wholly independent credits with wholly independent Issuing Bank undertaking.

- In transferred credit, second beneficiary obtains payment undertaking of Issuing Bank in the transferable LC.
- In back-to-back credit, second beneficiary does not obtain Issuing bank’s undertaking of payment in the original credit - Transferred amount no longer exists in Transferable LC - In back-to-back credit transaction, two separate LCs coexist - Transferable credit is issued at the request of applicant with consent of Issuing Bank. - Back-to-back credit is not the intention of applicant and Issuing Bank in master credit

Type of LC: Back-to-Back Credit (5) Example of back-to-back credit P142 …… Special Conditions: …… 4. This credit shall become operative only upon our receipt from Trader=applicant of the documents conforming to terms and conditions of master Credit No.PM889 5. This credit amount is payable subject to the final payment. Since trade hypothecate master credit instead of deposit & the payment of Master Credit depends upon whether trader’s documents conform to Master Credit(which is a unknown)the 2nd Issuing Bank normally requires that draft be drawn on trader(instead of 2nd Issuing Bank contrary to UCP500 Article 9), consignee of B/L be “to the order of 2nd Issuing Bank”, 2nd Issuing Bank have first lien on the amount in Master Credit, …… to protect the interest of 2nd Issuing Bank.

Type of LC: Back-to-Back Credit (6)
Back-to-back credits are two separate credits in which one is being offered as security for the open of another.
Back-to-back credit 2 Advising / 2nd Issuing Bank The same

Advise/ Nominated bank

Master Credit 1 Issuing bank

Trader
2Advise

4Counter credit

3Apply

2 Issuing Bank
nd

nd

1st beneficiary

If 2 credit is issued by a bank other than the advising bank of master credit, the credit is referred to as counter credit, the name of which is not important.

Type of LC: Back-to-Back Credit (7) ★ Why a back-to-back credit ? The possible reasons are that some official documents would reveal seller’s name and address under transferable LC, e.g. Certificate of Origin, etc. If so, the best option is back-to-back Credit, and trader could avoid revealing his middleman’s position as transferable LC would do. ★ Invoice,draft and official documents must be substituted.

★ Neutral names(forwarder and custom agent) can be used on B/L, etc. just as transferable LC,but not on official documents.

Singapore Exporter/Importer

Type of LC: Reciprocal Credit
Contract of processing on order Terms of payment: DC 1

Malaysia Importer/Exporter

Beneficiary of 1st LC
Applicant of 2nd LC

4 Adv.

5apply

The 1st LC is a terms Credit, in which, Malaysian buys spare parts from Singaporean to assemble into machine. The 2nd LC is a sight Credit, in which Singaporean buys assembled machine from Malaysian & makes sight payment. The two LCs would offset amounts at one Issuing Bank and the balance would be paid in cash.
DC(2):This is a reciprocal Credit against Commercial Development Bank Credit No.MS1024 favoring Universal Metals Trading(Pte)Co., Ltd. Jaran Jurang Singapore 584A, covering shipment of spare parts of ……(P.143) 6

Applicant of 1st LC
Beneficiary Of 2 LC

7Adv.

2apply

Advising Bank Issuing Bank

DC(1)This Credit should not be available unless & until the reciprocal credit is established by Trust Union Bank, Singapore in favor of Tamali Trading Co. Ltd. Ampang for amount of USD100,000 covering shipment from M to S (P.143) 3

Issuing Bank Advising Bank

Type of LC: Red Clause / Anticipatory Credit (1)

Exporter
1I

2I

will offer you some.

Importer

am short of working capital! Applicant
Please open a letter of credit offering advance payment before shipment! 3

Beneficiary

5 advise

Advising / Negotiating Bank

LC with advance terms and guarantee to compensate advancing bank if any default by borrower (seller) which used to be in red 4

Issuing bank

Type of LC: Red Clause / Anticipatory Credit (2) Sample P145 Red Clause: We hereby authorize the Commercial Trust Bank, Jaran Jurang Singapore at your discretion to grant to the beneficiary up to 60% of the USD100,000. Any Interest accrued thereon should be charged to you from the date of this advance to the date of repayment Undertaking clause: In consideration of your bank making such advance to the beneficiary who may eventually fail to effect shipment covered by the credit, we guarantee repayment and undertake to pay you on demand any sum owing by the beneficiary in respect of such advance together with interest. Exporters of sheep wool in Australia are farmers, who are frequently short of working capital for packaging, carrying wool to seaport and loading them onto ship. So, they normally ask for pre-shipment advance.

Type of LC: Red Clause / Anticipatory Credit (3) 1. Exporter hands in A. a receipt for advance payment. Beneficiary B. an undertaking to utilize the funds to purchase and pack merchandise. C. the undertaking of beneficiary to present full set of Apply for documents stipulated in LC within LC expiry. advance1
Advance, usually 2580% of LC amount. 2

Exporter

The rest of procedure is same as usu. LC

2. Two ways of paying interest: - discount the advance at market rate to the maturity of LC Advising / - collect interest + principal at the time when beneficiary Negotiating hands in documents. Bank

Type of LC: Red Clause / Anticipatory Credit (4) Exporter
1. Before maturity of LC, beneficiary hands in documents to nominated bank. 2. If documents comply with LC, Negotiating Bank deducts principal (+interest if not discounted in advance) & pay the rest to beneficiary.

Beneficiary

2balance after deducting principal(+interest) 1documents

3. If beneficiary does not hands in documents before maturity of LC, advancing bank would ask issuing bank to pay principal +interest and issuing bank would ask applicant to pay principal and interest.

4. Negotiating Bank could refuse to advance Advising / if finding too much risk in it. Negotiating
Bank

Type of LC: Standby Credit (1) Difference between Commercial LC and Standby LC
Commercial LC
Documents

Standby LC

simple, to evidence apparent complicated to evidence delivery of goods / service non-performance or failure of an obligation of applicant by beneficiary invoice, insurance & transport documents, etc. a draft & statement of default

Regulating rules

UCP 500

ISP 98 Buyer or Seller Seller or Buyer

Applicant Beneficiary

Always buyer
Always seller

It is LC in form and it is banker’s guarantee (L/G) in nature.

Type of LC: Standby Credit (2)
Sample P146

…… We guarantee to you that if the obligations incumbent upon in accordance with the credit are not duly fulfilled by the Buyer, we will refund the sum of USD400,000 with interest at the rate of 10% per annum to you against Written notification and certificate issued by yours Otto Marine Equipment Co., Ltd…….
Types of Standby LC:

1. Performance Standby, applicant is seller, beneficiary is buyer
2.Advance Payment Standby, applicant is seller, beneficiary is buyer 3. Bid/Tender Bond Standby, applicant is seller, beneficiary is buyer

4.financial Standby, applicant is debtor, beneficiary is creditor

etc.

Type of LC: Irrevocable Straight Credit (1)
Exporter 1 Contract Term of payment: Documentary Credit Importer

Beneficiary

There is no nominated bank. Payment must be made at Issuing Bank

Applicant

4 Advise

2Apply

Advising Bank

3 Documentary Credit: The expiry place is at Issuing Bank, i.e. document must be sent to the counter of Issuing Bank on or before expiry date of LC.

Issuing Bank

Type of LC: Irrevocable Straight Credit (2)
Exporter

Documents must be sent through Advising Bank.
To be sure that documents can arrive at the counter of Issuing Bank before maturity, beneficiary must deliver goods and prepare documents in a hurry and deliver documents to Advising Bank far before the expiry date, for nobody can be certain about posting time Even payment under sight LC must be more than 30 days before beneficiary get the payments.
8Pay compliant documents
7Forward

Importer

Beneficiary

Applicant

5Docs.

6Pay

9documents

documents

Advising Bank

Expiry place of LC

Issuing Bank

End of Lecture Thank you for attending




友情链接: